Rambaldi (Trustee) v Meletsis, in the matter of the bankrupt estate of Karas

The plaintiffs' submissions 14 The plaintiffs advanced the following grounds, each of which it was submitted gives reason to doubt the veracity of evidence given by Mr Meletsis in this proceeding since the making of the freezing orders, such that the continuation of the receivership orders pending the determination of the appeal is just or convenient. 15 The first point was this. In an affidavit that Mr Meletsis filed on 6 March 2022 in compliance with orders made as part of the freezing orders, he swore that the Lygon Street property was mortgaged to Custodian (Australia) Pty Ltd (Custodian) to secure a line of credit facility of up to $5 million provided to Hallmark. He exhibited an epitome of mortgage supplied to him by Custodian, and swore that "Hallmark owes application fees ($137,500) and legal fees ($7,600) to Custodian in respect of the granting of this facility, but has not been able to pay them because of the Freezing Orders". 16 At [65] of the affidavit, he swore: The primary purpose of obtaining the Custodian Facility was to assist in the funding of the purchase of the business referred to in paragraph 59 above and, if I decided to, to acquire the associated freehold. I was also contemplating improvements to and redevelopment of the Thornbury properties [which are commercial properties owned by Hallmark]. 17 The business that he referred to was described at [59] as follows: When the Covid restrictions in Melbourne began to ease, I commenced making [enquiries] to acquire a cash-flow business to provide me with a further income stream to service the various borrowings by myself and my entities. I identified a suitable business some six months ago and commenced the due diligence exercise in and around November 2021. This completed around late January 2022. I regard the information of my proposed purchase as being commercial in confidence. The due diligence was favourable and as a consequence I began sourcing funding from Glendora in order to acquire the business. 18 Earlier in the affidavit, he deposed to a second facility, the "Glendora facility", which is secured over a property that he owns at Doncaster Road, Balwyn North, as follows at [14] and [15]: The Doncaster Road property is further encumbered by a second registered mortgage to Glendora Pty Ltd (Glendora), which mortgage secures a loan of $1.8m by Glendora to me and Hallmark as joint borrowers (Glendora Facility). The terms of the Glendora Facility are contained in an epitome of mortgage, a copy of which is now produced and shown to me and marked "NM-1". The Glendora Facility is repayable on 28 February 2023. $1.8 m (less a small PEXA fee) was advanced to Hallmark pursuant to the Glendora Facility and paid to Genesis [Holdings (Aust) Pty Ltd] on 1 March 2022. Although I signed a disbursement authority prepared by Mr Bill Velos, solicitor acting for Glendora, on 26 February 2022, as a consequence of the Freezing Orders I have not been able to draw upon the Glendora loan funds, including to pay the $124,500 in fees and advance interest to Glendora as provided for in the Direction to Pay authority. Now produced and [shown] to me and marked "NM-2" is a true copy of the Direction to Pay, used to disperse funds. (Mr Meletsis deposed that Genesis Holdings (Aust) Pty Ltd (Genesis) was the sole shareholder of Hallmark, and he in turn was the sole shareholder of Genesis.) 19 In summary, therefore, as at 6 March this year, Mr Meletsis swore that the $5 million Custodian facility was undrawn and the $1.8 million Glendora facility had been fully drawn and paid to Genesis (the parent of the borrower, Hallmark), but that he had not been able to draw upon any part of those sums as a consequence of the freezing order. 20 Mr Meletsis swore another affidavit on 7 March in accordance with orders made on the same day, and produced a screen shot from a mobile banking application showing a deposit into a bank account operated by Genesis of the sum of almost $1.8 million. Mr Meletsis swore further affidavits on 12 and 17 March that he had been unable to access the $2,000 living expenses permitted under the freezing orders. 21 But on 8 September, in compliance with a direction I made upon the making of the ex parte receivership orders, Mr Meletsis produced to the trustees bank statements and transaction history reports of Genesis, one of which statements showed that on 2 March 2022 - 4 days before he swore in his 6 March affidavit that he had been unable to draw upon the Custodian and Glendora facilities - the sum of $600,000 had in fact been paid out of the Genesis account. 22 As Mr Yeo swore in his 19 October affidavit, he does not know, because Mr Meletsis has not identified the account into which the sum of $600,000 was paid, whether that account was accessible to him, and why the transfer was made. 23 It was further submitted that the screen shot to which I have referred was designed to give the impression that the sum of $1.8 million was still in the Genesis account as at the date of the screen shot annexed to Mr Meletsis's 7 March affidavit, when it was not. 24 It was also submitted that Mr Meletsis's statement in his 17 March affidavit that he and his family had had no access to funds to meet ordinary living expenses was untrue if the sum of $600,000 was in fact available to him. 25 Mr Meletsis swore another affidavit dated 14 November 2022. At [6]-[10] he said this: I swore my affidavit of 6 March 2022 in compliance with the freezing orders made on 1 March 2022 to the best of my knowledge and ability in the time available to me. The contents of the affidavit were accurate, save in respect of the secured debt to Isaac Smith, the omission of which I have explained in my 11 October 2022 [affidavit]. In preparing the Affidavit of 6 March 2022, I accessed all my bank accounts and looked at all the monthly liabilities of each bank statement and current invoices. That is how I came to the conclusions made in my formulation of NM-5. As there were no entries on my bank statements or current invoices referencing Isaac Smith after 26 July 2021, I inadvertently overlooked the moneys owing to him as well as moneys to be owed for works that he eventually completed. ARY-51 [annexed to Mr Yeo's 2 September 2022 affidavit] sets out that Isaac Smith could lodge a caveat to secure payment to himself at any time of his choosing which only came about when the Lygon Street Property was sold. In paragraph 15 of my 6 March affidavit, I stated that Glendora had advanced a sum of $1.8m (less a PEXA fee) to Hallmark, which amount was paid to Genesis on 1 March 2022. I also stated that, as a consequence of the freezing orders, Hallmark had been unable to draw on these loan funds. On 2 March 2022 my wife called me and said that our Westpac credit card was not working and she could not buy [medications] for our son. I then went to the Westpac branch at Sunshine where I learnt for the first time that Westpac had receiving the freezing order. This was at approximately 12.15pm on 2 March 2022. After learning this I contacted my solicitor who informed me that he was having difficulties with his office computers to open up the email he had received from Frenkel Partners [the solicitors for the plaintiffs] attaching the freezing order. Otherwise, I have deposed to these circumstances in previous Affidavits. At the time that I became aware of the freezing order, the Glendora funds had been advanced and paid to Hallmark which had also prior to that time been transferred to Genesis by Hallmark. I refer to the email sent by Mr Berk [of Frenkel Partners] at 5.09 pm on 2 March 2022, a copy of which is included in exhibit ARY-55. I discussed its contents with Mr Phillips [the solicitor for the defendants] shortly thereafter and he informed me, he did not agree with all of its contents and told me the key features of the discussion between himself and Mr Berk concerned the following:- • my wife's embarrassment at the chemist (at which time she was endeavouring to buy Ventolin for our now 4 year old son) when her Westpac credit card was declined; • a brief discussion regarding the terms of the Freezing Order; and • that he would require additional time to prepare my affidavit which I eventually swore on 6 March 2022. I refer to paragraph 17 (f) of Mr Yeo's 19 October 2022 affidavit. By paragraph 2(c) of his orders made on 7 March 2022, Justice O'Callaghan varied the freezing orders by, inter alia, inserting a new paragraph 10(aa), permitting certain payments from the Genesis account, subject to Hallmark filing and serving an affidavit exhibiting documents relating to the Glendora loan, including an extract or bank statement on the Genesis account which demonstrated all deposits to that account made on 1 March 2022 (paragraph 10(aa)(ii) of the freezing orders as varied). In compliance with that requirement, I exhibited to my 7 March 2022 affidavit a screenshot of Genesis Holdings' bank account balance of $1,799,716.68 as at 1 March 2022 at 8.57pm (exhibit NM-7). [I] did this because I understood that that was what the Court required of me. I refer to paragraph 19 of Mr Yeo's 19 October affidavit regarding a payment of $600,000 from Genesis's Westpac Bank account of 3 March 2022. I did not understand that the freezing orders required me to disclose transactions of Genesis. 26 Senior counsel for the trustees made the following submissions about that evidence: Mr Meletsis swore an affidavit on 14 November, the day that this proceeding was back before your Honour. And he gives an explanation from paragraphs 6 to 10, which addresses in part only the last of those complaints made by Mr Yeo. So it explains why he didn't disclose the withdrawal of the $600,000. And, in summary, his evidence is he didn't think he had to. What he doesn't do is explain why he gave evidence on 6 March that he hadn't drawn down on those funds when he had. He doesn't explain what happened to those funds. He doesn't explain whether they were available to him at the time he swore his other affidavits. Those are matters that had been specifically raised by Mr Yeo, and had been deliberately not addressed in Mr Meletsis' [responsive] material. That's the first and most significant piece of evidence that causes the trustees real concern as to whether the freezing orders will be complied with. 27 The second matter of concern raised by the trustees related to Mr Meletsis's (admitted) failure, in his March affidavit, to disclose the liability of $50,000 to Mr Isaac Smith, who had lent Hallmark $50,000 for the purposes of paying legal fees in respect of the trial before Davies J. 28 That failure emerged when the trustees were investigating the sale of the Lygon Street property. Mr Meletsis gave this explanation in his 11 October affidavit: I apologise for my oversight in failing to detail the two Agreements that I had with Mr Isaac Smith in my affidavit of 7 March 2022 setting out the assets and liabilities of myself and my various entities. At that time, I had forgotten that Mr Smith had lent the $50,000 to Hallmark and I had not received any tax invoice or request for any payment from Mr Smith with respect to the works that he ultimately carried out on the Lygon Street property culminating in his invoice to Hallmark in Annexure NM-22. 29 Senior counsel for the trustees submitted that that explanation is most unlikely, for the following reasons deposed to by Mr Yeo in his 19 October 2022 affidavit, as follows (at [37]ff): At paragraph 4(n) of [his] October Affidavit, Mr Meletsis describes the omission of the Isaac Smith loan as an "oversight". The nature and circumstances of the Smith Agreements as outlined in paragraph 31 of my September affidavit, together with the following matters, cause me to believe that it was not an oversight. First, in his affidavit sworn on 6 March 2022, Mr Meletsis expressly refers to funds that he had "urgently borrowed to pay the legal fees for the preparation and conduct of the trial in these proceedings, amongst some other things." The loan from Isaac Smith satisfies that description: at paragraph 4(g) of his October affidavit, Mr Meletsis swears that Mr Smith advanced him $50,000 to assist the funding of that trial, and that the advances were made between Wednesday 21 July and Friday 23 July 2021. The trial began on Monday 26 July 2021. In the same paragraph, Mr Meletsis states that the agreement regarding the works performed by Mr Smith was entered on 5 July 2021 (which is the same day as appears on the Smith loan document). Secondly, at paragraph 4(h) of his October affidavit, Mr Meletsis confirmed that he prepared the loan and security documents on behalf of Isaac Smith himself. Thirdly, Mr Smith appears to be a witness to Hallmark's certificate of acceptance of the loan from Southage to Hallmark dated 11 November 2019, produced by Bill Velos, so there appears to be an ongoing association between Mr Meletsis and Mr Smith. [Mr Yeo then annexed that certificate.] Fourthly, the work claimed in Mr Smith's invoice to Mr Meletsis (exhibit NM-22) did not finish until 1 February 2022 - less than five weeks before Mr Meletsis swore the 6 March affidavit. Fifthly, the invoice from Isaac Smith to Hallmark is dated 23 June 2022 (despite the final work item on the invoice being on 1 February 2022). Even if Mr Meletsis was unaware of the Smith Agreements at the time that he swore his 6 March affidavit, he became aware of it after receiving Mr Smith's invoice (presumably, on or around 23 June 2022) and yet chose not to swear an affidavit rectifying his breach of the disclosure requirements in the Freezing Orders. The Smith Invoice was only revealed to me by Mr Smith's lawyer during my investigations of the settlement of the Lygon St property. 30 Senior counsel for the trustees made the following submissions in that regard: So the arrangement is entered into in June 2021. The work is done in the period ending February 2022, and Mr Smith gives Mr Meletsis an invoice in June 2022. Now, Mr Meletsis knew in June 2022, that he had sworn his affidavits in March where he was obliged to disclose all the assets and liabilities to this court. He knew that he hadn't disclosed the liabilities to Mr Smith. The existence of those liabilities was brought to his attention by an invoice from Mr Smith on 23 June, and yet Mr Meletsis chose not to rectify his breach of the terms of the freezing orders by swearing an updating affidavit, until the existence of the Smith debts was uncovered by the trustees in September, and brought to the court's attention by means of the receivership application. It wasn't until after Mr Meletsis learned that the trustees had become aware of the Smith debt that he decided to make his own disclosure to the court. 31 The third matter of concern raised by the trustees related to Mr Meletsis's apparently inconsistent evidence about the Custodian application fee of $137,500. In his 6 March affidavit he swore that the fee was owed. But according to an email written by Mr Meletsis's solicitor to the solicitor of a mortgagee and dated 17 August 2022, that sum was to be paid out of the proceeds of sale of the Lygon Street property. Then in his 14 November 2022 affidavit, Mr Meletsis's evidence was that in relation to the balance of liabilities referred to in his 6 March affidavit, including the application fee, there were "[n]o payments to Custodian - facility still available not drawn down". 32 The fourth matter of concern raised by the trustees was put this way in oral submissions: The fourth point also relates to the Custodian loan. This relates to the loan itself. You will recall that I took you to the March evidence, where Mr Meletsis swore that the purpose of [the] Custodian loan was to enable him to purchase this cashflow positive business, and potentially also the freehold associated with that business. That's what he said was the purpose of that facility in March. In his November affidavit, at paragraph 19, he sings an entirely different tune. And I refer to paragraph 50(d) of Mr Yeo's 19 October '22 affidavit [to which Mr Meletsis responded in his 14 November affidavit as follows]: [The Custodian loan is primarily for the purpose of assisting me to pay out the plaintiffs in the event that my current Full Court appeal is unsuccessful. I haven't paid the Application Fee on that loan and none of it has been drawn down.] So here we have another [contradictory] statement between Mr Meletsis' story in March and Mr Meletsis' story in November. And this goes directly to the Custodian facility, which is at the heart of the trustees' concerns. 33 The trustees also submitted in oral subissions that the terms of the receivership orders involve a "light touch", and pointed to the fact that they have offered to co-operate with the defendants, as follows: The purpose of the receivership is purely to prevent these properties being dissipated in breach of the freezing order. And the receivers have not taken possession of the properties. The receivers have demonstrated a willingness to cooperate with Mr Meletsis in the appropriate use of the properties. Mr Yeo has said, in his most recent affidavit, he has given evidence to that effect. … At paragraph 67 of his 19 October affidavit, Mr Yeo swears: [I am prepared to provide written correspondence to assist Hallmark with any bona fide loan applications, and to consent to the registration on title of any incoming mortgage if it is granted to secure a bona fide refinance of the Liberty Facility. I will of course also consider any other request that requires my consent as caveator (by reference to the terms of the Freezing Order and any other obligations upon me).] … So the receivership is of very limited impact. And the trustees have demonstrated their willingness to be cooperative in dealing with the properties as they need to be dealt with, so long as that's consistent with the terms of the freezing order, and their obligations as trustees. So there's no prejudice sufficient to justify the lifting of the receivership. Certainly not in the context of the significance of the concerns by the trustee. And the likely imminence of the decision of the Full Court which will either overturn or confirm the decision which gave rise to the judgment debt, for which the freezing order has been obtained.

The defendants' submissions 34 Senior counsel for the defendants made the following submissions. 35 First: The allegation that the sale of Lygon Street was in breach of the freezing orders was ill-considered and ought never have been made. The freezing orders restrain Mr Meletsis and Hallmark from removing from Australia or in any way disposing of, or dealing with or diminishing the value of, their assets in Australia up to the unencumbered value of $4,200,000. The sale of the Lygon Street property did not have that effect. Concerns as to a dissipation of assets on this basis were unwarranted and certainly did not support the appointment of the plaintiffs as receivers to the property of Hallmark. (Internal quotes omitted.) 36 Secondly, it was submitted: Mr Meletsis genuinely overlooked the secured debts owed to Mr Isaac Smith when he swore his 6 March affidavit. He has explained this oversight. He concedes that he ought to have disclosed these debts and the security. He had no reason to conceal them. The payment of the debts has had no material effect on Hallmark's compliance with paragraph 6(a) of the freezing orders. 37 Relevantly, it was also submitted that the payment of Mr Smith's debts from the proceeds of sale of the Lygon Street property has not caused Hallmark to be in default of its obligation under the freezing orders. 38 Thirdly, as to the withdrawal of the $600,000 from the Genesis account, it was submitted: The production of Genesis' bank statements on 8 September prompted the plaintiffs to complain to Westpac that $600,000 had been drawn from Genesis' bank account on 3 March 2022 under the bank's watch (so to speak), and an allegation that the transaction occurred without the knowledge of our clients in contravention of the Order. The plaintiffs rely on Mr Meletsis' failure to disclose the $600,000 payment as a basis for a concern about the veracity of the evidence that he has given to the Court in response to the freezing orders. It provides no such basis. The freezing orders neither restrained the payment nor obliged Mr Meletsis (or Genesis) to disclose it to the plaintiffs or the Court. (Internal quotes omitted.) 39 Finally, it was submitted: The case for the interlocutory appointment of the plaintiffs as receivers to Hallmark's properties is, at best, feeble. It is certainly not "strong" in the sense ordinarily required. The application was initially brought on the basis that the freezing orders had been breached. That is not the case, save in respect of the oversight with respect to disclosure of the Isaac Smith debt and security. Moreover, it is not shown that an appointment would be just and convenient, particularly having regard to the potential consequences which the appointment of receivers may have for banking facilities to which Hallmark is a party. Nor has it been shown that an appointment is necessary.

Applicable principles 40 The applicable principles are well established and there was no disagreement about them between the parties. 41 Section 57 of the Federal Court of Australia Act 1976 (Cth) provides: Receivers (1) The Court may, at any stage of a proceeding on such terms and conditions as the Court thinks fit, appoint a receiver by interlocutory order in any case in which it appears to the Court to be just or convenient so to do. (2) A receiver of any property appointed by the Court may, without the previous leave of the Court, be sued in respect of an act or transaction done or entered into by him or her in carrying on the business connected with the property. (3) When in any cause pending in the Court a receiver appointed by the Court is in possession of property, the receiver shall manage and deal with the property according to the requirements of the laws of the State or Territory in which the property is situated, in the same manner as that in which the owner or possessor of the property would be bound to do if in possession of the property. 42 As French J (as he then was) said in Australian Securities and Investments Commission, re Richstar Enterprises Pty Ltd v Carey (No 3) [2006] FCA 433; (2006) 232 ALR 577 at 587 [29]: The appointment of a receiver has rightly been described as "an extraordinary step" - ASIC v Burke [2000] NSWSC 694 at [8] (Austin J). However depending upon the nature of the powers conferred on the receiver it may be less drastic than a freezing order which can only be varied by order of the court. 43 In Woods v Harrison, re Telco Service Holdings Pty Ltd (in liq) [2017] FCA 732, Beach J said at [36]: The condition on the grant of the statutory power under s 57 is expressed in broad terms, being where it is "just or convenient so to do". It may be noted that the statutory power does not confine itself to the scenario of a Mareva receiver nor does it countenance a limitation on the exercise of the power or an implicit fetter based upon phraseology of the type: "the appointment of a receiver is an extraordinary and drastic remedy, to be exercised with utmost care and caution and only where the court is satisfied there is imminent danger of loss if it is not exercised" or the power "should be exercised only after great scrutiny and in extraordinary circumstances". That is not the phraseology of the statutory power that I was requested to exercise and nor is any such limitation consistent with the authority of this Court. The applicable position is that stated by French J (as his Honour then was) in University of Western Australia v Gray (No 6) [2006] FCA 1825 at [71] where he stated: The power of the Court to appoint a receiver is statutory. It has its origins, however, as an equitable remedy. An order in the nature of an equitable remedy can be made under s 23 of the Act. The class of circumstances in which such power may be exercised is not closed. Nor are the purposes for which a receiver may be appointed and the powers and conditions attaching to such an appointment. There may be many circumstances of considerable diversity which would warrant such an order and it is important that the discretion not be unnecessarily confined by any particular line of cases to which it has been applied. 44 In the same case at [41], Beach J said that the appointment of a receiver may be warranted when the defendant had shown a "propensity to use corporate entities under his control for the purpose of transferring assets".

Consideration 45 In my view, this is a clear case where the appointment of the receivers should continue, pending the determination of the appeal to the Full Court. 46 The evidence of Mr Meletsis, for the reasons submitted on behalf of the plaintiffs, is unsatisfactory in a variety of respects, and shows that he has, as Beach J put it in Woods v Harrison, a "propensity to use corporate entities under his control for the purpose of transferring assets". 47 The four matters relied upon by the trustees, especially when viewed as a whole, make compelling the submission that: [T]he trustees have no faith whatsoever in what Mr Meletsis has told the court. Because the things that Mr Meletsis has told the court, which the trustees can't rely on, include matters that he was obliged to inform the court about pursuant to the freezing orders, they have no confidence that the freezing orders will be complied with. And that's the reason why there is good cause for the ongoing maintenance of the receivership. 48 It seems to me, on the other hand, that the defendants' submissions do not confront the pattern of conduct by Mr Meletsis revealed by the facts relied upon by the trustees. Further, they cannot point to any significant prejudice, in particular in light of the limited role that the receivers will play in the period up until judgment in the appeal, and the receivers' willingness to cooperate with Mr Meletsis in the appropriate use of the properties in the meantime. 49 Accordingly, the defendants' application to set aside the 5 September 2022 orders will be dismissed. It follows that my order of 5 September 2022 remains in effect. 50 At the hearing on 5 December, the trustees also sought orders restraining the defendants from drawing on the Custodian facility, and that the defendants file and serve an updating affidavit regarding their assets. These orders were not opposed by the defendants and I will make those orders. 51 The trustees also sought what was described by senior counsel for the defendants as "interrogatories", being orders requiring the defendants to file and serve affidavits addressing matters involving various entities and persons related to the defendants, and exhibiting relevant documents including bank statements. The gist of the submissions made on behalf of the trustees as to why such orders were necessary was that, in light of the inconsistencies in Mr Meletsis's evidence, it would enable the trustees to "better interrogate the affidavit material". 52 With respect, and as I said at the hearing, it seems to me that if the receivership is to continue in accordance with the terms of the 5 September 2022 order (which, for the reasons I have given, it will), there is no need for the trustees to "interrogate" the affidavit material in order to be satisfied that the defendants' assets are sufficient to meet the judgment debt owed, pending the determination of the appeal. It follows that I will not make the orders sought by the trustees in that regard. I certify that the preceding fifty-two (52) numbered paragraphs are a true copy of the Reasons for Judgment of the Honourable Justice O'Callaghan.

SCHEDULE OF PARTIES VID 1279 of 2017 Defendants Fourth Defendant: ESTABLISHMENT 5 DEVELOPMENTS PTY LTD (ACN 154 426 614) Fifth Defendant: TOM KARAS (A BANKRUPT)